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Classical Growth Theory
Growth in real GDP is temporary - real GPD per person rises above the substince level
Neoclassical growth theory
holds that without technological change no growth in real GDP will occur because changes in technology lead to increased saving and investment
New growth theory
Argues that economic growth continues indefinetely as technology advances. This occurs because decreases in the real rate intensify the incentive to discover new products and methods
Economic Regulation
Includes the regulation of natural monopolies and the regulation of competitive industries
Social Regulation
Involves regulation across all industries
Main Objective of Economic Regulation
Controlling entity to b e able to dictate an industry-wide pricing policy for the firms within the industry. This serves to prevent monopolies and predatory competitive practices
Cost of Service Regulation
Involves the establishment of a pricing policy which sets teh maximum price firms are permitted to charge customers based upon industry wide average costs to produce the product or service.
Rate of return regulation
Permits producers and service providers in the regulated industry to establish their own prices
One Third Rule
States that at a given level of technology
1) change in capital per labor ours
2) technology change
Incentive System
Most important precondition to realize Ecnomic growth. This is facilitated through 3 institutions.
1) Markets facilitate the exchange of information between buyers and sellers and enable them to conduct businesses with each other. In order for markets to be effective
property rights and monetary exchange are required.
2) Property rights are laws and regulations that govern the ownership
use and sale of goods
3) monetary exhange - provides for efficient exchange of goods + services.
Sources of Economic Growth
1) Land
2) Capital Goods
3) Labor
4) Entrepreneurship
Effect of Social Regulation
Policy makers try to achieve product quality
Firm\\\'s Response to Regulation
Creative Response - following the law but not conforming to its gaols. Eg interview both men and women but hiring only women.
Feedback Effect - Consumers\\\' behavoir is changed as a result of new regulation. New MPG efficiency standards are put into place and which in turns leads to more unnecessary driving.
2 theories of regulator\\\'s behavoir
Capture Hypothesis - regulatory bodies will be comprised of former industry experts with existing ties with industry leaders which will affect regulator\\\'s decisions
Share the Gains
Share the Pains Theory - Regulators will try to satisfy the legislators
Since regulated industries leads to higher costs for consumers. The cost of regulation has led to deregulation.
Short Run effect of deregulation is unemployment
decrease in product quality and product prices may increase
Long Rune benefits include better service more variety and lower costs
Comparative Advantage
Lowest opportunity cost of production
Law of Comparative Advantage
Holds that trading partners can be made better off if they specialize in the production of goods for which they are the low opportunity cost producer and trade for goods for which they are the high opportunity cost producer.
Contestable Market
A competitive market with few participants that is efficient due to the threat of new entrants.
Tax imposed on imported goods
Limitation on the quantity of goods imported. Quota is worse than tariff because the government does not recieve any revenue from this regulation.
Voluntary Export Retraint
Agreements by exporting countries to voluntarily limit the quantity of goods they will export to an importing country.
Arguments for Trade Restrictions
Developing industires should be protected while they become more competitive
Exporters should be prohibied from selling goods abroad at less than production costs (anti dumping)
Protect Industries associated with national defense.
Countries with tax collection problems
can raise taxes through tariffs
Trade with low wage countries depresses wage rates in high wage countries.. (due to a new supply of labor)
Real Exchange Rate
Nominal Exchange Rate multiplied by the ratio of 2 price levels
Export Effect
Decreases in currency value should increase quantity demanded for that currency because of exports
Import Effect
Increases in succrency value should increase quantity supplied
Reason for exchange rate volatility
Same factors (interest rates and future exchange rate) affect both supply & demand
Purchasing Power Parity
Based on the idea that the same goods should cost the same in different countries.
Interest Rate Parity
Exchange rates must change so that the return on investments with identical risk will be the same in any currency. Changes in exchange rates should just offset interest rate differences between countries.
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